DEPARTMENT OF DEFENSE CONTRACTOR'S 

GUIDE TO VALUE ENGINEERING

Version 2.3

May 2011
“Across the Department’s Research and Engineering enterprise, we are driving 

Innovation, Speed, and Agility. These coordinates can be applied to the Value 

Engineering community. They define the approach and operating space in which you 

work and for which so many are today receiving awards. Innovation, Speed and Agility 

are critical to transforming how the Department examines processes, provides solutions 

and fields capabilities to our Warfighters.

Congress and our Secretary have placed an emphasis on a critical examination of, and 

increased efficiency in, how the Department spends the American tax-payer dollars. Last 

Saturday, the Secretary of Defense emphasized this priority when he stated, “The goal is 

to cut our overhead costs and to transfer those savings to force structure and 

modernization within the programmed budget.” This is no easy task and it falls to you, the 

Value Engineering community to lead the way and to the Department to accept this 

challenge and provide continuous process improvement as part of the solution. The way 

forward is embedded in the Value Engineering mandate: to identify actions that reduce 

cost, increase quality, and improve mission capabilities.”

May 22, 2010 Value Engineering Awards Ceremony, the Honorable Zachary Lemnios, 

Director, Defense Research and Engineering, Office of the Under Secretary of Defense 

for Acquisition, Technology, and Logistics
iii

Contents

1. What is VE?.................................................................................................................1

2. Potential VE Applications...........................................................................................3

3. What is a VECP? .........................................................................................................5

4. Types of VE Provisions in Contracts ..........................................................................7

A. What To Do if There Are No VE Provisions in the Contract .............................7

B. Subcontractor VE ................................................................................................7

C. VE and Performance-Based Contracts................................................................7

5. Benefits of Submitting VECPs....................................................................................9

A. Benefits to the Department of Defense ...............................................................9

B. Benefits to Contractors......................................................................................10

6. Preparing VECPs.......................................................................................................13

A. VECP Marketing ...............................................................................................13

B. Basic Requirements of the Formal VECP.........................................................14

C. Format of the Formal VECP .............................................................................15

D. Where to Send VECPs ......................................................................................15

E. Transmittal Letter..............................................................................................15

F. Restricting Data.................................................................................................16

G. Additional VECP Guidelines ............................................................................16

7. Sharing of VECP Savings .........................................................................................19

A. Acquisition Savings...........................................................................................19

B. Collateral Savings..............................................................................................21

C. Sharing Savings with Subcontractors................................................................21

D. Contractor's Guide for Effective VE .................................................................22

Appendix A Points of Contact ........................................................................................ A-1

Appendix B Abbreviations ..............................................................................................B-1

Figures

Figure 1. Joint Government Industry Value Proposition.....................................................9

Figure 2. DOD VE Savings and Cost Avoidance ..............................................................10
iv
1

1. What is VE?

Value Engineering (VE) is an effective technique for reducing costs, increasing 

productivity, and improving quality. It can be applied to hardware and software; 

development, production, and manufacturing; specifications, standards, contract 

requirements, and other acquisition program documentation; facilities design and 

construction. It may be successfully introduced at any point in the life cycle of products, 

systems, or procedures. VE is a technique directed toward analyzing the functions of an 

item or process to determine "best value," or the best relationship between worth and cost. 

In other words, "best value" is represented by an item or process that consistently 

performs the required basic function and has the lowest life-cycle cost. In this context, the 

application of VE in facilities construction can yield a better value when construction is 

approached in a manner that incorporates environmentally-sound and energy-efficient 

practices and materials.

Because "costs" are measurable, "cost reduction" is often thought of as the sole 

criterion for a VE application, and indeed, cost reduction is primarily addressed in this 

document. However, the real objective of VE is "value improvement," and that may not 

result in an immediate cost reduction.

VE originated in the industrial community, and spread to the Federal Government 

due to its potential for yielding a large return on investment. VE has long been recognized 

as an effective technique to lower the Government’s cost while maintaining necessary 

quality levels. Its most extensive use has been in Federal acquisition programs. The 

Federal Government’s application of VE to projects, processes, and products has 

demonstrated success. Annually the Department of Defense (DOD) reports savings in 

excess of $1 billion.

VE is a management tool that can be used alone or with other management 

techniques and methodologies to improve operations and reduce costs. For example, the 

emphasis on performance-based specifications, the design-build project delivery process, 

and the use of Integrated Product Teams (IPTs) can include VE and other cost-reduction 

techniques, such as life-cycle costing, cost as an independent variable, concurrent 

engineering, and design-to-cost approaches. These techniques are effective as analytical 

tools in process and product improvement. VE can be used with Lean Six Sigma 

processes to challenge requirements and identify functions that cost more than they are 

worth. 

The DOD VE program has two distinct components: 

An in-house effort where VE is performed by DOD military and civilian 

personnel and
2

An external effort where VE is performed by DOD contractors and applied to 

contracts after DOD approval.

This latter component is the principal subject of this document. With few exceptions, 

it is mandatory (since June 1962) to include VE provisions in most DOD contracts to 

encourage contractor participation and thereby realize the full benefits from cost reduction 

opportunities and innovations. These contract provisions provide the basis for the 

contractor to obtain a share of the savings that result from an approved VE effort. Before 

this development, submitting a cost-reduction change led to a commensurate decrease in 

the size of the contract and usually reduced profit by a proportional amount. The VE 

provisions changed this paradigm by providing the contractor with an incentive to submit 

Value Engineering Change Proposals (VECPs) to reduce cost.
3

2. Potential VE Applications

Many items in the DOD inventory are regularly procured in large quantities in 

accordance with Government-developed specifications. Due to advances in technology, 

materials, and processes, the applicable specifications may be outdated, and 

"technological regression" by a contractor may be needed to produce to the existing 

specifications. Items in this category are good candidates for a VE project. However, 

costly, non-value added contract requirements not directly related to the specifications 

should not be overlooked. Packaging, shipping requirements, management reports, etc. 

may represent a target of opportunity which will require minimal, or no, investment by the 

contractor to achieve a reduced cost of performance under the contract.

Another area that offers potential for VE is where an item was designed and 

developed on a stringent schedule to meet urgent requirements. Under these conditions, 

the designers often incorporate "old, reliable" components or subsystems into the design 

simply because time will not permit qualification of an improved substitute. However, a 

newer, less expensive, and more reliable alternative may have been developed and proven 

since the original system development. When this situation arises, submission of a VECP 

to incorporate the improved item or subsystem should be considered. Diminishing 

manufacturing sources and material shortages (DMSMS) provide significant and 

potentially funded opportunities for VE. DOD Components are beginning to program 

resources to mitigate these very serious problems. Such resources could be a source of 

funding for non-recurring costs associated with a VE project. In addition, DMSMS may 

also be established as a life-cycle cost element for categorizing and identifying cost 

savings.

Typical opportunities for VE projects will be derived from a known problem, a cost 

driver study, or anything that indicates a product or a process should be improved. In the 

early stages of VE application within an organization, sophisticated project-selection 

criteria are not usually needed. Numerous opportunities are frequently available for VE to 

offer substantial benefits such as eliminating high cost drivers; improving performance, 

reliability, or producibility; or resolving executive management interest issues.

Potential for VE may be found in almost any aspect of a contract or program. A 

general listing of these aspects (not all-inclusive) follows:

Construction 

Design or equipment modifications 

Equipment and logistics support 

Facilities and hardware 

Manufacturing processes 

Materiel handling and transportation 
4

Packaging/packing and preservation 

Procurement and re-procurement 

Publications, manuals, procedures, and reports 

Quality assurance and reliability 

Parts obsolescence 

Salvage, rejected, or excess material 

Site preparation and adaptation 

Software (computer) programs and flow charts 

Software architecture development 

Specifications/drawings 

Technical and logistics data 

Testing, test equipment, and procedures 

Tooling 

Training 

While value engineering is applicable at any point in the life cycle, the savings 

potential decreases as the program ages. VE should be applied as early as possible in the 

life cycle. Early VE tends to produce greater savings (or cost avoidance) because that is 

where most of the costs are committed--opportunities for change are greater and the 

changes cost less to implement. 

However, if early opportunities are missed, VE can still be applied. VE late in a 

program is precluded only in those rare instances where the cost of the VE effort and 

subsequent implementation would be greater than the savings potential. Many systems 

remain in inventory for a substantial amount of time, often longer than originally planned. 

While later VE normally adds implementation costs and affects smaller quantities, such 

deterrents are typically offset by improved performance and reliability through (1) 

advances in technology and (2) savings generated from increased product life. Usually, 

some opportunities offer net savings at any stage of a program.
5

3. What is a VECP?

A VECP is a proposal submitted to the Government by the contractor in accordance 

with the VE clause in the contract. It proposes a change to the contract that, if accepted 

and implemented, provides an eventual, overall cost savings to the Government. A VECP 

may update an existing design to the current state-of-the-art technology, simplify complex 

material by modifying or eliminating components, update specifications/drawings 

providing improved data for future procurements, or reduce Contract Data Requirements 

List (CDRL) items, to name a few examples. Despite the term "value engineering," no

engineering effort is required; only a proposal that reduces the cost of performance under 

the contract and requires a contract change for implementation. The VE provisions in a 

contract prescribe that the contractor receives a substantial share in the savings accrued as 

a result of implementation of the change.

A VECP does not require a change in a specification; it requires only a change in the 

contract. In order to qualify as a VECP and to ensure that savings can be shared, the 

proposed change must be submitted under a current contract and must meet two primary 

requirements:

1. It must require a change to the contract under which it is submitted. 

2. It must provide an overall cost savings to the Government after being accepted 

and implemented. 

Note that a VECP could result in increased hardware cost but reduced Operations 

and Support (O&S) cost, resulting in an overall savings to the Department of Defense. A 

VECP can be submitted at any time under an active contract with a VE clause.

DOD has established a knowledge-based community of practice (CoP), initially 

focused on VECPs, to help practitioners share and learn from one another, face-to-face 

and virtually. The CoP will help navigate the VECP process, improve the probability of 

successful VECP evaluations, provide assistance and answers to technical questions, and 

serve as a forum for disseminating the latest information. The CoP can be accessed by 

going to the Defense Acquisition University's Acquisition Community Connection Web 

site at https://acc.dau.mil/CommunityBrowser.aspx?id=399567&lang=en-US.
6
7

4. Types of VE Provisions in Contracts

The basic VE provision is the VE incentive (VEI) clause in the Federal Acquisition 

Regulation (FAR). The VEI clause is included in most supply/service contracts when the 

contract price exceeds $100,000. It is also included in most spares/repair kit contracts over 

$25,000 if the contract is not for standard commercial parts. The VEI clause may be 

included in contracts under $100,000 if the contracting officer sees a potential for 

significant savings. If the VEI clause is in the contract, contractor participation is 

voluntary. However, when contractors participate in the VE program by originating, 

preparing, and submitting VECPs, they will be rewarded for their (and any of their 

subcontractors') ideas if the ideas are adopted by the procuring activity. The sharing rate 

(percentage of the savings) received by the contractor is specified in the FAR.

In addition to the basic VEI clause, the FAR contains alternative provisions that can 

be incorporated into a contract that requires a mandatory VE effort by the contractor. This 

is known as the VE Program Requirement (VEPR) clause, and may be included in initial 

production solicitations and contracts for major programs if the contracting officer 

determines that significant savings may result from a sustained, specified VE effort. 

Typically, solicitations and contracts employing a VEPR include a Statement of Work, a 

CDRL requirement to submit VECPs, and a separate Contract Line Item. The use of the 

VEPR has declined in the Department of Defense due to the extensive amount of 

Government preparation and oversight required to manage it.

A. What To Do if There Are No VE Provisions in the Contract 

A contractor could have an idea for a VECP but has a contract containing no VE 

provisions. In this case, the contractor should notify the Procuring Contracting Officer 

(PCO) that it has an idea and would like to submit a VECP. The contractor should request

that a contract modification be issued as soon as possible to incorporate applicable FAR 

provisions. Normally, VEI provisions will suffice. However, if the contractor's idea will 

require significant initial funding and the marketing/pre-sell efforts have indicated that the 

Government is interested, the contractor may request the VEPR provision. 

B. Subcontractor VE

The FAR requires prime contractors to extend VE provisions to their subcontractors 

on contracts of $150,000 or greater. VE provisions should also be extended to 

subcontractors on contracts of lesser value unless the nature of the work precludes VE 

benefits. A subcontractor must submit its VECP to the prime contractor who, in turn, 

submits it to the Government. (See also Subsection 7C.)

C. VE and Performance-Based Contracts

Recent changes to promote acquisition excellence have mandated the increased use 

of performance-based contracts. Some believe that performance-based contracting would 
8

eliminate the contractor's incentive to submit VECPs because, under a performance based 

contract, contractors could make changes without Government approval and keep all the 

savings. However, a contractor would submit a VECP and share the savings with the 

Government for several reasons. In situations where there are high development and 

implementation costs, new or risky technologies, changes that require Government test 

facilities, or changes that impact the acceptance of products, it is mutually beneficial for 

contractors to submit (and the Government to accept) VECPs. Without VECPs, the 

contractor would most likely refrain from any investment because of the risks involved. In 

addition, even in a performance-based contract, some areas that remain under Government 

control may have VECPs submitted for them. Finally, in a contract where cost and pricing 

data may be collected, often it is beneficial for a contractor to submit a VECP to secure a 

share of future savings that otherwise would be negotiated away as general efficiencies.
9

5. Benefits of Submitting VECPs

As depicted in Figure 1, the Government and its contractors depend upon each other 

to improve their joint value proposition. While the value propositions are different, there 

is overlap; actions that benefit one can benefit the other. Typically, incentives are used in 

the contract so that the contractor behaves in a way that will enhance both value 

propositions. VE provides and is based on a shared value concept through incentives for 

the Government, incentives for the contractor, and the equally shared incentive of 

providing the best possible war fighting capability and systems to the military within the 

context of a successful business relationship. VE incentivizes industry to use its best 

engineering talent in a way that helps solve problems that are important to the 

Government.

Source: Adapted from Lean Aerospace Initiative incentives research

Figure 1. Joint Government Industry Value Proposition

A. Benefits to the Department of Defense

In today's market, VE has proven to be a sound economic venture. Its overall record

of performance (where it has been intelligently applied, discreetly managed, and honestly 

reported) is impressive. Over the past 30 years, the return on investment on VE projects 

has been approximately 16 to 1. Figure 2 shows DOD VE savings and cost avoidance 

since fiscal year 1981. Cumulatively, more than $47 billion has been saved, with an 

average exceeding $1 billion annually.

Equally important is how the savings are used. The dollar savings/assets made 

available through VE successes may be reapplied within the program, command, or 

component to finance approved but previously unfunded requirements.

Assure the

pre-eminent military strength

of our country by

providing the 

warfighter with

superior

weapon systems

 Customer 

satisfaction

 Planning 

stability

 Good 

financial 

performance

 Cash flow

Contractor

Value

Proposition

Government

Value

Proposition

Shared Value Proposition

Achieved with Incentives

Source: Adapted from Lean Aerospace Initiative economic incentives research

 Reduced 

production 

costs

 Reduced life 

cycle costs

 Equal or 

better 

performance
10

From a qualitative perspective, Value Engineering creates opportunities for the 

Department of Defense to achieve long-term benefits in cost reduction, communications, 

procedures, waste reduction, performance, efficiency, reliability, producibility, quality, 

effectiveness, readiness, war-fighting capability, cycle time, and so on.

Figure 2. DOD VE Savings and Cost Avoidance

B. Benefits to Contractors

From the contractor's perspective, the benefits of using Value Engineering are also 

substantial. The contractor: 

Shares in the savings that accrue from implementation, in that VECPs provide a 

source of profit not available under other provisions of the contract and excluded 

from profit limitations on government contracts; 

May increase the work to be performed on the contract if the Government share 

is placed back on the contract for previously unfunded efforts; 

May secure a price advantage during system re-procurement after implementing 

a successful VECP on a previously completed system/item; 

Establishes a reputation as a cost-conscious supplier (the Department of Defense 

presents VE Achievement Awards to contractors); 

Improves communication with the customer; 

Receives reimbursement of development cost on approved VECPs; 

May obtain usable technology for other product lines; 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

80 83 85 87 89 91 93 95 97 99 00 02 04 06 08 10

Fiscal Year

TOTAL

(VEP)

$47B (VECP)

$M (Then Year)
11

Enhances the retention and growth of corporate technical expertise through 

advanced technology insertion and fostering a positive working environment; 

and

Each of these benefits is relatable to the elements of the contractor value 

proposition in Figure l--customer satisfaction, planning stability, good financial 

performance and cash flow. 
12
13

6. Preparing VECPs

VECP preparation encompasses marketing the idea, gaining informal Government 

approval, developing the required information, and making a formal submission.

A. VECP Marketing

VE clauses in DOD contracts are not enough. The clauses merely invite or require 

contractors to question the value of Government specifications, statements of work, and 

requirements that contribute nothing (except cost) to the contract tasks or items being 

acquired. Both parties (the Government and the contractor) must work together to capture 

the actual benefits of VE efforts.

As with any change to an active contract, communication between the contractor and 

the approving authority is critical because a VECP is a change to the contract and thus a 

change to the program. A program manager's primary concerns are schedule, 

performance, and cost. Any change that could impact any of these areas requires early 

discussion and general agreement from all parties involved, including the Procuring 

Contracting Officer (PCO) and the Administrative Contracting Officer (ACO) for the 

particular contract. 

Because the cost of preparing a formal VECP is often extensive, it is important for 

the contractor to pre-sell or market the VE idea. Pre-selling enables the contractor to get 

an indication from the Government of whether a potential idea should be pursued. The 

contractor should get to know the Government Point of Contact (POC)/Government VE 

advocate who will have the responsibility for evaluating and recommending approval of

the VECP. A potential VE idea should be presented as early as possible to the appropriate 

POC/advocate. 

This informal submission may take the form of a presentation that details the 

technical aspects of the idea, its advantages and disadvantages, an estimate of the cost to 

implement, potential cost savings, and as many of the eight minimum requirements of 

paragraph (c) of FAR 52.248-1. A contractor is not required to make an informal 

submission, but such a submission is likely to improve the contractor's chances of success 

for acceptance of a formal VECP, especially if the development of the idea presents the 

possibility of significant risk to the contractor or the program. This presentation can help 

the Government determine whether the idea deserves additional consideration or should 

not be pursued. If the Government is receptive to the idea, the contractor can request the 

Government's views on qualification and testing requirements as well as other 

Government cost impacts. The Government's validation that the preliminary proposal has 

potential to be accepted as a VECP does not guarantee that the VECP will actually be 

accepted/approved nor does it guarantee ownership of the idea. Also, the Government's 

favorable response does not obligate the contractor to submit a VECP, nor does it obligate 

the Government to pay for effort already expended on the VE initiative. 
14

While a preliminary, informal submission does not eliminate all risk to the 

contractor, it reduces contractor risk by preventing a contractor's expenditure of 

significant funds and time on ideas that have little or no chance of being accepted or 

approved. In rare cases of concurrent competitive contract efforts, an independent formal 

submittal of a VECP from a competitor may preempt the favorable consideration of a 

preliminary proposal. The Government is prohibited from unilaterally using a contractor's 

VECP idea or sharing it with a competitor, but there is no prohibition on competitors 

independently pursuing similar efforts and making independent formal submittals. 

Submission of a preliminary presentation does not establish ownership of a VE idea 

or the right to share in any resultant savings. Ownership is established only after a fully 

documented formal VECP is submitted. 

In summary, preliminary submission of an idea(s) for a VECP is advantageous to the 

contractor because: 

It establishes a "date of record" for contractor development costs incurred in 

preparation of the VECP.

It reduces the risk of expending time, effort, and funds on an idea that the 

Government does not deem worthy of pursuit. 

B. Basic Requirements of the Formal VECP

When the contractor makes the decision to submit a VECP, the individual(s) 

responsible for preparing it should realize that the chance of the VECP being approved is 

proportional to the completeness of its preparation. Sufficient information must be 

presented so that the Government can conduct a thorough evaluation within a reasonable 

amount of time. Failure to provide adequate data will usually result in a request for 

additional data (which significantly delays the process) and could result in rejection of the 

VECP. The contractor should prepare a VECP using an approach similar to responding to 

a formal procurement solicitation. The following is the FAR description of the minimum 

information required for a VECP submission: 

1. A description of the difference between the existing contract requirement and the 

proposed requirement, the comparative advantages and disadvantages of each, a 

justification when an item’s function or characteristics are being altered, the 

effect of the change on the end item’s performance, and any pertinent objective 

test data.

2. A list and analysis of the contract requirements that must be changed if the 

VECP is accepted, including any suggested specification revisions.

3. Identification of the unit to which the VECP applies.

4. A separate, detailed cost estimate for (i) the affected portions of the existing 

contract requirement and (ii) the VECP. The cost reduction associated with the 

VECP shall take into account the Contractor’s allowable development and 
15

implementation costs, including any amount attributable to subcontracts under 

the Subcontracts paragraph of this clause.

5. A description and estimate of costs the Government may incur in implementing 

the VECP, such as test and evaluation and operating and support costs.

6. A prediction of any effects the proposed change would have on collateral costs to 

the agency.

7. A statement of the time by which a contract modification accepting the VECP 

must be issued in order to achieve the maximum cost reduction, noting any effect 

on the contract completion time or delivery schedule.

8. Identification of any previous submissions of the VECP, including the dates 

submitted to the agencies and contract numbers involved, and previous 

Government actions, if known.

C. Format of the Formal VECP

The FAR clause does not specify a particular format to be followed in preparing a 

VECP. Most contractors use the standard Engineering Change Proposal (ECP) format 

with the "value" considerations added. Configuration management should be performed in 

accordance with the terms of the contract. Any questions should be directed to the 

Government contracting officer.

D. Where to Send VECPs

The FAR governs the distribution of VECPs. The clauses for supply/service 

contracts require that VECPs be submitted to the PCO and to the ACO when the contract 

is administered by other than the Defense customer (e.g., Defense Contract Management 

Agency). Copies should also be sent to the appropriate Program Office and to the 

Government VE Office or VE advocate as appropriate.

The Government VE advocate should be made aware of the VECP to assist in 

expediting the evaluation and to support the accept/reject decision process by the PCO. 

The Government VE advocate monitors all VECPs received and, through close 

coordination with the PCO and Program Office, facilitates timely processing. The 

Government VE advocate can also serve as a point of contact from which the contractor 

may obtain the status of the VECP.

E. Transmittal Letter

Preparation of a transmittal letter forwarding the VECP is also important to 

achieving success. The transmittal letter should state that the VECP is being submitted 

pursuant to the VE provisions of the contract. The transmittal letter should also serve as a 

summary of the contents of the VECP and should briefly state the nature of the proposed 

change, provide estimated price changes, and refer to where complete details can be found 

in the proposal. The transmittal letter serves as a table of contents of the proposal and as a 
16

marketing document, bringing out the highlights of the proposal in both technical 

advantage and overall cost reduction to the Government. 

F. Restricting Data

Normally, the Government has unlimited rights to use the data in a VECP. If a 

VECP contains information that the contractor wishes to restrict from use before 

Government approval, the contractor should include an appropriate legend on each page 

of the VECP. The FAR language for supply/service contracts for this legend is as follows:

This data, furnished under the VE clause of Contract No. ______, shall not 

be disclosed outside the Government or duplicated, used, or disclosed, in 

whole or in part, for any purpose other than to evaluate a VECP submitted 

under the clause. This restriction does not limit the Government's right to 

use information contained in these data if it has been obtained or is 

otherwise available from the contractor or from another source without 

limitations.

However, if the VECP is accepted, the Government normally has the right to use any 

and all data contained in the VECP and its supporting documents. 

If the VECP contains proprietary data that the contractor wishes to restrict even after 

acceptance of the VECP, a statement to that effect must be included in the VECP. The 

proposal should be marked with the appropriate limited rights legend from the "Rights in 

Technical Data and Computer Software" clause of the DOD Federal Acquisition 

Regulation Supplement, and the contractor must explain in the proposal the basis for 

asserting limited rights. The contract modification implementing the VECP should specify 

the limited rights that the Government has accepted. The contractor should realize, 

however, that a VECP that results in a sole-source condition for future acquisitions might 

not be as readily accepted as one for which this restriction on sources is not imposed. 

G. Additional VECP Guidelines

The following additional guidelines apply to submission of a VECP: 

1. When a contractor submits a VECP for approval, the contractor should not 

initiate action to implement the change until the contractor receives a formal 

contract modification approval from the Government. 

2. When a contractor submits a VECP, the contractor should identify other similar 

or related contracts to which the VECP may apply (if known). The contractor 

should identify the potential to use other program customers to participate in the 

VECP nonrecurring cost (e.g., foreign military sales customers). 

3. When a contractor undertakes a VECP effort, the contractor must keep records of 

development costs and require that subcontractors do the same. 

4. Contractors should be as accurate as possible in calculating implementation costs 

and insist that the Government provide accurate and complete data when 

calculating Government implementation costs. 
17

5. When a VECP is incorporated into the contract, the contractor should maintain 

internal records identifying the first item delivered containing the VECP.

6. The contractor may withdraw the VECP in whole or in part prior to 

acceptance/rejection. However, any withdrawn VECP or portion thereof may be 

subsequently incorporated into the contract without payment of a share of the 

cost savings to the contractor. This mechanism helps preclude a possible 

situation where the contractor, not satisfied with the contracting officer’s 

determination of the worth of a VECP and the associated share in cost savings, 

withdraws the idea to place the contracting officer in an unfair negotiating 

position.
18
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7. Sharing of VECP Savings

The Department of Defense has been encouraging submission of VECPs since the 

VE policy was first established in the FAR. Many changes have occurred over the years 

that have clarified the FAR language and increased the contractor's share of savings. 

Acquisition and collateral savings are two basic types of savings that can be shared 

when a VECP is approved and implemented under a supply/service contract. Subsections 

7A and 7B describe the sharing arrangements for firm fixed price contracts with VEI 

provisions, and Subsection 7C discusses sharing arrangements with subcontractors. 

Sharing arrangements vary with other types of contracts. FAR Parts 48 and 52.248-1 

provide the definitions of terms used in VE, the criteria for VECP acceptance, and cost 

savings sharing arrangements. In addition, incentive contracts may contain special 

provisions that ensure no adjustments are made to targets or ceilings when an approved 

VECP results in instant contract VECP savings are rewarded under the overall contract 

cost incentive. Whatever the type of contract, it is the Government's intent to offer a full 

range of motivational VE options to contractors while precluding duplication of 

incentives. 

A. Acquisition Savings

The FAR defines "acquisition savings" as "...savings resulting from the application 

of a VECP to contracts awarded by the same contracting office or its successor for 

essentially the same unit." Acquisition savings may include savings obtained on the 

instant contract, concurrent contracts, and future contracts. 

The instant contract is the contract under which the VECP is submitted. If the VECP 

is accepted and implemented on items delivered under this contract, the contractor will 

receive a percentage share of the net savings that accrue as a result of the VECP. The 

contractor's costs (and subcontractor's, if applicable) for development and implementation 

of the VECP and the Government's costs for implementation are all considered when 

calculating savings. A contractor's development costs are those costs incurred in 

developing, testing, preparing, and submitting the VECP. Development costs materialize 

after it has been determined that a VECP will be prepared and before acceptance of the 

VECP by the Government. Implementation costs are those costs resulting from 

contractual changes required as a result of Government acceptance of the VECP. 

Implementation costs materialize after the VECP has been approved. It shall include any 

subcontractor's allowable development and implementation costs and any value 

engineering incentive payments to a subcontractor that clearly result from a VECP 

accepted by the Government under this contract. The contractor may choose any 

arrangement for subcontractor value engineering incentive payments provided that the 

payments shall not reduce the Government's share of concurrent or future contract savings 

or collateral savings. The arrangements negotiated for the instant contract are continued in 
20

future contracts, including any negative instant contract savings for the contractor 

submitting the VECP to the Government. 

Concurrent contracts are those contracts that the VECP originator (referred to as 

Contractor A) and other contractors (Contractors B, C, etc.) have for essentially the same 

item. If the Government directs that contractor A's VECP be incorporated into Contractor 

B or C's contract, then Contractor A will receive a share of the net savings that are 

obtained from Contracts B or C (any contract affected by contractor A's VECP). 

Contractor A's instant contract total price will then be increased by that amount. 

Acquisition savings can be shared in one of three ways. If the Government can 

predict with some degree of certainty the number of affected items to be procured within 

the share period (and this number is not classified), the "lump-sum" method of settlement 

can be used if the contractor and the contracting officer so agree. The contract 

modification incorporating the VECP will specify the anticipated future procurement 

quantity. The cost savings per unit are then multiplied by the anticipated share period 

quantity, and the instant contract price is increased by the contractor's share of that 

amount. 

The primary way of sharing future savings is for the contractor to receive a portion 

of the per-unit savings that occur either as contracts incorporating the VECP are awarded 

or as VECP-affected units are delivered. This sharing applies to items scheduled for 

delivery within the determined share period (as described in the FAR), which begins upon 

acceptance of the first item affected by the VECP. In the case of multi-year contracts, 

sharing applies only to quantities that (1) are fully funded at the time of VECP 

acceptance, and (2) fall within the determined share period. It is the contractor's 

responsibility to maintain records from the time the first VECP-affected unit is accepted 

until the determined VECP share period ends. Whenever the Government issues a new 

contract during this share period for essentially the same item, and the contractor's VECP 

has been incorporated into the contract documents, the contractor is entitled to a portion of 

any per-unit savings occurring during the share period. Payment will be made via the 

instant contract when savings are realized. Normally, the savings per unit that were 

calculated for the original contract will be multiplied by the number of units scheduled for 

delivery prior to expiration of the share period. Also, in design or low rate initial 

production contracts, the Government may modify the usual VE clause to improve 

contractor incentives. If the clause is so modified, the sharing formula is expressed in 

terms of a specific quantity and not in time. This quantity is the number of units affected 

by the VECP that are scheduled to be delivered over a period between 36 and 60 

consecutive months (set at the discretion of the contracting officer for each VECP as 

described in the FAR) that span the highest planned production, based on planning and 

programming or production documentation existing at the time the VECP is accepted. 

The third way of sharing savings with the contractor is the "no-cost modification" 

method. Under this method, the contractor keeps all savings from the instant contract and 

concurrent contracts. The Government keeps all savings from future contracts and 

concurrent contracts with other sources as well as all collateral savings. This method, if 
21

agreed upon by both the Government and the contractor, can minimize the administrative 

costs of determining and negotiating savings. It should be noted that if the "lump-sum" 

method or the "no-cost settlement" method cannot be mutually agreed upon, then the 

future per-unit-savings method will be used.

B. Collateral Savings

Collateral savings are those measurable net reductions in cost of operation, 

maintenance, logistics support, shipping, or Government-furnished equipment that result 

from an accepted VECP. In some situations, a VECP might increase the acquisition cost 

of an item but result in substantial collateral savings. For collateral savings, the contractor 

is entitled to 20 to 100 percent (determined by the contracting officer as described in the 

FAR) of the savings that the Government estimates will be realized during an average 

one-year period. However, the contractor's share shall not exceed $100,000 or the value of 

the instant contract, whichever is greater. The Government determines the amount of 

collateral savings. Some contractors have had several VECPs approved and implemented 

with substantial collateral savings. However, determining and verifying measurable net 

reductions can be difficult and, in some instances, the Government may exclude the 

collateral savings program. 

C. Sharing Savings with Subcontractors

As discussed above, the prime contractor's allowable development and 

implementation costs shall include any subcontractor's allowable development and 

implementation costs and any VE incentive payments to a subcontractor that clearly result 

from a VECP accepted by the Government under this contract. The contractor may choose 

any arrangement for subcontractor VE incentive payments provided that the payments 

will not reduce the Government's share of concurrent or future contract savings or 

collateral savings. 

Prime-to-subcontractor VE arrangements can be made by the prime contractor 

extending to the subcontractor any or all of the instant contract savings or a percentage of 

whatever amount the prime contractor receives as its share of concurrent contract share, 

collateral share, and future acquisition share. For example, a simple paragraph could be 

included in a subcontract to provide a 50 percent share of whatever dollar amount the 

prime contractor receives in the four areas of sharing on a successful VECP. 

The sharing between prime contractor and subcontractor can be a matter of 

negotiation between them and should provide motivation for the subcontractor to submit 

VECPs to the prime contractor. It should also provide a fair share to the prime contractor 

who is responsible for putting a subcontractor's VECP into proper format and "selling" it 

to the Government. Any development and implementation costs incurred by the 

subcontractor, and the share of instant contract savings extended to the subcontractor, are 

considered to be a part of the prime contractor's development and implementation costs.
22

D. Contractor's Guide for Effective VE

The following questions can help the contractor determine whether they have the 

attitudes and disciplines needed to have a viable, effective VE program: 

1. Does the company establish VECP goals? 

2. Do VECP goals flow down throughout the corporate structure? 

3. Are contractor management personnel involved in VECP decisions and approve 

VE operating goals and budgets? 

4. Do contractor management personnel consult with key Government personnel on 

the use of VECPs as a cost-reduction tool and gain Government agreement on 

the need to apply the VE methodology to the system being acquired? 

5. How do contractor personnel benefit from contributions to approved VECPs? 

Are special awards or recognition given? 

6. Do contract negotiators understand the FAR VE provisions? 

7. Are VE sharing provisions in subcontracts company policy? 

8. Does the company's accounting department identify VECP income separately so 

that: a) management personnel can recognize the monetary benefit of VE? b) 

Management can be kept informed of expenditures and receipts resulting from 

the VE effort? 

9. Are resources assigned specifically for the development of VECPs? Does the 

company work to minimize the time to: a) Develop a VECP? b) Obtain internal 

approval prior to submission of a VECP to the Government? 

10. Does the company conduct formal VE workshops to expand in-house 

capabilities? 

11. Is there a VE training and indoctrination program? Is there coordination between 

Government contract administration and the company's marketing efforts with 

respect to VECPs? 
A-1

Appendix A

Points of Contact

DOD 

Elizabeth Rodriguez-Johnson

Phone: (703) 695-4893 

Elizabeth.Rodriguez-Johnson@osd.mil

Army

Donald Pennington Matt Schade

Phone: (410) 436-1691 Phone: (309)782-7787

donald.w.pennington@us.army.mil matthew.schade@us.army.mil

Department of Navy

Fred Beata Michael Skratulia 

Phone: (703) 614-9638 Phone: (703) 697-1884 

frederick.beata.ctr@navy.mil Michael.Skratulia@navy.mil 

Air Force 

None

DLA 

Mary Hart 

Phone: (703) 767-1637 

Mary.Hart@dla.mil 

Missile Defense Agency 

Toni Hamilton Eddie Japzon

Phone: (256) 955-1296 Phone: (703) 882-6313

Toni.hamilton@mda.mil Eddie.Japzon@mda.mil

Defense Contract Management Agency 

Ramlala Sinha

Phone: (703) 428-1127

Ramlala.sinha@dcma.mil 

Defense Finance and Accounting Service 

Jim Layton 

Phone: 317 510-4221

Jim.Layton@dfas.mil

Defense Intelligence Agency

Steven Gershman

(202) 231-4605

Steven.Gershman@dia.mil
A-2
B-1

Appendix B

Abbreviations

ACO Administrative Contracting Officer

CDRL Contractor Data Requirements List

CoP Community of Practice

DOD Department of Defense

DMSMS Diminishing Manufacturing Sources and Material 

Shortages

ECP Engineering Change Proposal

FAR Federal Acquisition Regulation

IPT Integrated Product Team

O&S Operations and Support

PCO Procuring Contracting Officer

POC Point of Contact

VE Value Engineering

VECP Value Engineering Change Proposal

VEI Value Engineering Incentive

VEPR Value Engineering Program Requirement
B-2